Updated: Court Throws Out FCC's 30% Cable Subscriber Cap

The U.S. Court of Appeals Friday threw out the FCC's cap on the number of cable subscribers one operator can serve, saying the FCC was "derelict" in not giving DBS its due as a legitimate competitor.

"We agree with Comcast that the 30% subscriber limit is arbitrary and capricious. We therefore grant the petition and vacate the rule," said the court, which concluded that there was ample evidence of an increasingly competitive communications marketplace and that cable did not have undue control on the programming pipeline."

But FCC chairman Julius Genachowski suggested the court decision would not be the last word on the cap.

"As part of the Cable Act, Congress required the commission to adopt horizontal ownership limits to enhance effective competition in the cable television marketplace," he said in a statement. "The FCC staff is currently reviewing the Court's decision with respect to the limit previously adopted and the commission will take this decision fully into account in future action to implement the law."

"[T]he commission has failed to demonstrate that allowing a cable operator to serve more than 30% of all cable subscribers would threaten to reduce either competition or diversity in programming," the court concluded. "First, the record is replete with evidence of ever increasing competition among video providers: Satellite and fiber optic video providers have entered the market and grown in market share since the Congress passed the 1992 Act, and particularly in recent years. Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992. Second, over the same period there has been a dramatic increase both in the number of cable networks and in the programming available to subscribers.

"In view of the overwhelming evidence concerning 'the dynamic nature of the communications marketplace,' and the entry of new competitors at both the programming and the distribution levels, it was arbitrary and capricious for the commission to conclude that a cable operator serving more than 30% of the market poses a threat either to competition or to diversity in programming."

"We are pleased the DC Circuit has vindicated our position," said Comcast executive director, corporate communications and government affairs Sena Fitzmaurice. "This important decision affirms that rules must reflect the changing realities of the dynamic video marketplace where today consumers have more choice in video providers and channels than ever before."

"We applaud the court's decision to reject an unnecessary rule that can no longer be justified in a market where consumers are enjoying robust competition that is producing a wide variety of world class services at affordable prices," said NCTA president Kyle McSlarrow. "Today's decision is further affirmation that consumers are benefitting from a vibrant and competitive video marketplace that has undergone dramatic change and is providing more choice and better value than ever before."

The same court had asked the FCC back in 2001 to rethink the cap in light of increased competition from DBS. The three-judge panel, whose ruling was issued Friday, was particularly unhappy with the FCC's failure to give DBS its due this time around as well.

"The commission's dereliction in this case is particularly egregious," wrote judge Douglas Ginsburg. "In the previous round of this litigation we expressly instructed the agency on remand to consider fully the competition that cable operators face from DBS companies...The commission nonetheless failed to heed our direction and we are again faced with the same objections to the rationale for the cap. It is apparent that the commission either cannot or will not fully incorporate the competitive impact of DBS and fiber optic companies"

Oral argument in the case was held last April. The judges did sufficient probing into the DBS issues, as well as competition from other sources, to leave even cap supporters suggesting it would be a tough case to win.

Then FCC chairman Kevin Martin teamed with the agency two Democrats, Michael Copps and former commissioner Jonathan Adelstein, to uphold the cap in 2007. Copps is the only one of those three still on the commission. Friday he told Multichannel News that the defense was not the FCC's best work, but suggested that might not be the last word.

"This place doesn't always put its best foot forward to explain the legal underpinning of its decisions," said Copps. "I think that this will begin to change now under our new leadership. But meanwhile, it is unfortunate that the effort to contain industry consolidation has been, hopefully, temporarily, sidetracked."

The FCC majority may have defended the decision, but Republican commissioner Robert McDowell did not, and predicted this outcome from the outset.

"It was clear in December 2007, when I dissented from the FCC decision to once again impose a 30 percent national cap on cable system ownership, that the effort to re-justify the very same cap that the D.C. Circuit first struck down in 2001 was even more vulnerable to court challenge the second time around," said McDowell. "Despite the commission staff's best efforts to provide post hoc empirical support for the chosen outcome, the court recognized that the 2007 analysis' aging data and questionable assumptions sat oddly against the facts about new - and successful - competitors to cable systems in the multichannel video marketplace. It should go without saying that, in the future, outcomes in our proceedings should be driven by the facts and law, rather than the other way around."

McDowell almost waxed poetic in his critism at the time of the FCC's 2007 decision, when he essentialy etched his prediction in stone.

Evoking A Christmas Carol, McDowell said it was like the Ghost of Christmas Past, but also like the Ghost of Christmas Present in that it was ignorant of marketplace reality and wanting in any sustainable justification. And like the Ghost of Christmas Future, he added, its inescapable fate would be a cold, dark epitaph: "This order will be overturned by the court."

"I'm disappointed, but not surprised," said Andrew Schwartzman of Media Access Project. "Although Congress directed the FCC to establish limits on cable ownership in 1992, the D.C. Circuit Court of Appeals has been disinclined to approve such regulations. It is hard to imagine that any rule the FCC could devise would ever withstand review under the standards established in today's decision."

Swhwartzman said MAP will consult with the FCC on whether to seek Supreme Court review.

"This is not the end of the fight. Big cable's anti-competitive ownership structure has increased prices and limited choices for the American public. Therefore, we will consult with the FCC on whether Supreme Court review is feasible. If not, we'll be asking Congress to pass new legislation to insure more choice and lower prices for cable TV service."

Comcast, which is the only cable operator even close to the 30% cap, filed the suit back in March 2008, calling the FCC's 2007 decision arbitrary and capricious, as well as an abuse of its discretion.

The FCC majority -- in this case, Republican chairman Kevin Martin and the two Democratic commissioners -- voted back in December 2007 to reinstate that cap, with Martin saying that the fact that the FCC did not loosen it was, like the fact that it did not lift the newspaper broadcast cross-ownership ban entirely, a sign that the agency had listened to the complaints of anti-consolidation activists and concluded that no further cable deregulation was in the publicinterest.

That FCC decision came after the same D.C. court instructed it in 2001 to either throw out the cap or better justify its continued existence, saying that DBS had not been taken sufficiently into account and even offering up a 60% cap as a possibility.

The FCC majority in 2007 responded to the court by saying that the 30% limit was "designed to ensure that no single cable operator or group of operators, because of its size, could unfairly impede the flow of programming to consumers."

An FCC spokesperson had no comment on whether the commission would seek Supreme Court review. But one of the deficiencies the court had with the FCC's case was that the FCC offered up essentially anecdotal evidence for why it dismissed DBS as insignificant rather than trying to measure it.

If the FCC does try to make a case to the court, it will likely first do the kind of measurement the court was looking for.

The current FCC under Genachowski has made it clear that decisions need to be buttressed by good data.

He made that clear this week in announcing an inquiry into wireless competition, saying: "This is an important step in the process of laying a solid foundation for predictable, fact-based competition policy in the wireless sector, a process that will continue with the other competition reports the agency is responsible for preparing."